The August MPC meeting minutes reflected the change in vote split, with some differences in opinion among the committee now becoming apparent. The widest divergence was seen in growth assessments, both current and potential, with this also underpinning the vote split.
Continued moderation in core inflation was unanimously recognized, but the possibility of higher food prices spilling over to core remains a key concern. Real rate concerns raised their head again, but have not yet become the prevalent view among most committee members. Going forward, the RBI is likely to continue stressing on being ‘actively disinflationary’ and maintain a wait-and-watch mode to assess multiple macro forces, both domestic and global.
Policy position stays watchful, with some divergences emerging
With the August MPC having seen a change in vote split, from 5-1 to 4-2, the meeting minutes reveal increasing divergence among members, even as majority of the members continued to back a rate action pause and maintained status quo on the stance. While the moderation in core inflation was universally acknowledged, the rising prevalence and persistence of food price shocks as well as possibility of a spillover to the core was highlighted as a concern. There were also opposing views as regards growth and real rates, which underpinned the vote split.
Growth assessment sees significant difference in views
The biggest divergence in views was on the assessment of growth, both current and potential. Governor Das and Dr Ranjan contended that robust growth is allowing the MPC to focus on the inflation leg of the mandate, and that there is enough evidence for near-term growth staying strong. Dr. Patra presented a slightly different argument – that actual output is presently running ahead of potential output which makes it necessary to be vigilant on aggregate demand dynamics. On the other hand, Professor Varma and Professor Goyal stated that India’s potential growth rate is now likely higher (Professor Varma cited at least 8% as the new level) and, thus, the country is still growing below potential. Additionally, both members highlighted some early warning signs of near-term growth likely slowing, thus warranting the need for a rate cut.
Rising worries of food shocks spilling over to core inflation
On the inflation front, there was unanimous recognition of the moderation in core inflation. At the same time, there were some differing views on persistent food price shocks. Dr Goyal acknowledged higher food prices but noted that the better monsoons and improving supply chains are already helping prices to correct. She also mentioned that while household inflation expectations have risen, the increase has been marginal. Conversely, Dr Ranjan focused on the recent elevated trend for food inflation, stating that such persistent price pressures cannot be ignored due to the heavy share of food in household consumption and the risk of spillover to core inflation. Governor Das made the same argument, while Dr Patra asserted that food inflation is now taking longer to revert to the trend after shocks, thus negating any gains from core disinflation. In fact, Dr Patra made a forceful argument that persistently higher prices are always a reflection of excess demand, even if the initial price spike has been caused by a supply shock. He stated that monetary policy needs to bring down aggregate demand to the level of supply even in such situations, thereby making the most hawkish case for a rate pause.
Real rate worries solidify for some members
There were some comments on real rates, once again with differing inferences. Professor Varma continued to assert that a projected real rate of 2.1% (based on Q1FY26 CPI forecast of 4.4%) remains too high – with 1.5% being sufficiently restrictive, thereby calling for rapid cuts of at least 50bps. Professor Goyal had a similar estimation of the projected real rate; however, she referenced the low core inflation trend and slowing growth in stating that these conditions imply that real rates are higher than the neutral rate, and cuts are needed. On the other hand, Governor Das called the use of theoretical neutral rates to inform policymaking into question, especially when inflation is still higher than the target.